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Chapter 6: Problem 4

A study of consumers in Mexico found that the cross-price elasticity of demand between soda and milk was 0.11 , while the cross-price elasticity of demand between soda and candy was -0.32 . Is soda a substitute or a complement for milk? Is soda a substitute or a complement for candy? Briefly explain.

Short Answer

Expert verified
Soda is a substitute for milk and a complement for candy.

Step by step solution

01

Analyze the cross-price elasticity of demand between soda and milk

The cross-price elasticity of demand between soda and milk was found to be 0.11, which is a positive number. By definition of cross-price elasticity, if the coefficient is positive, then the goods are substitutes.
02

Analyze the cross-price elasticity of demand between soda and candy

The cross-price elasticity of demand between soda and candy was found to be -0.32, which is a negative number. By definition of cross-price elasticity, if the coefficient is negative, then the goods are complements.
03

Explanation of findings

Soda is a substitute for milk because when the price of milk increases, consumers turn to soda as an alternate drink, and thus the demand for soda increases. On the other hand, soda and candy are complements because if the price of candy increases, consumers reduce their consumption of candy and thus also reduce their consumption of soda, leading to a decrease in demand for soda.

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Most popular questions from this chapter

If the demand for orange juice is inelastic, will an increase in the price of orange juice increase or decrease the revenue that orange juice sellers receive?

Briefly explain whether the demand for each of the following products is likely to be elastic or inelastic: a. Milk b. Frozen cheese pizza c. Gasoline d. Prescription medicine

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The entrance fee into Yellowstone National Park in northwestern Wyoming is " 30 for a private, noncommercial vehicle; \(\$ 25\) for a motorcycle or a snowmobile; or \(\$ 15\) for each visitor 16 and older entering by foot, bike, ski, etc." The fee provides the visitor with a seven-day entrance permit into Yellowstone and nearby Grand Teton National Park. a. Would you expect the demand for entry into Yellowstone National Park for visitors in private, noncommercial vehicles to be elastic or inelastic? Briefly explain. b. There are three general ways to enter the park: in a private, noncommercial vehicle; on a motorcycle; and by foot, bike, or ski. Which way would you expect to have the largest price elasticity of demand, and which would you expect to have the smallest price elasticity of demand? Briefly explain.

The publisher of a magazine gives her staff the following information: $$ \begin{array}{l|l} \hline \text { Current price } & \$ 2 \text { per issue } \\ \hline \text { Current sales } & 150,000 \text { copies per month } \\ \hline \text { Current total costs } & \$ 450,000 \text { per month } \\ \hline \end{array} $$ The publisher tells the staff, “Our costs are currently \(\$ 150,000\) more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to \(\$ 3\) per issue. This will result in our revenue being exactly equal to our cost." Do you agree with the publisher's analysis? Explain. (Hint: Remember that a firm's revenue is calculated by multiplying the price of the product by the quantity sold.)
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